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The regime is outdated and inherently risky for advisers, but simplicity will also have drawbacks, says IPA.
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Certainty over tax residency rules ‘will come at a cost’
10 August 2023
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Tax residency rules are outdated, difficult to apply and inherently risky for advisers but changing them will be tricky and certainty will come at a cost, says IPA technical general manager Tony Greco.
He said the 80-year-old regime relied on subjective concepts such as the reside and domicile test and required a practitioner to prove their client’s intent, “which is problematic at the best of times”.
“Simply put, the current regime imposes risk for advisers under the tax self-assessment system,” he said.
“Practitioners require certainty and if they are uncertain their only real option is to seek advice from the ATO. This has resulted in a significant increase in the number of requests for private binding rulings.”
“It’s clear that these residency rules are no longer fit for purpose, but identifying the problem is the easy part. How we actually transition to a modern set of rules that can addresses the shortcomings of the current regime is a bit more complicated.”
He said the starting point for reform were recommendations by the Board of Taxation that placed greater reliance on objective tests. A primary test would specify that anyone physically present in Australia for 183 days or more in any income year was an Australian tax resident.
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A secondary test, applied if an individual spent fewer than 183 days here across two income years, was based on 45 days of physical presence and other factors that would establish whether the individual had sufficient connections to Australia to be treated as a tax resident.
But he said a lack of detail threw up “interesting interpretational issues” that could create complexity and undo some of the simplicity.
“The proposed framework will provide more certainty and less compliance costs for the majority of taxpayers,” he said.
“Once an individual has spent sufficient time in Australia, and made enough connections to become a tax resident, the proposed framework assumes it is appropriate for the individual to remain a tax resident until those connections are scaled back to such an extent that they no longer benefit from their connection to Australia enough to justify being taxed as a resident.
“As a result, this new overriding principle will make harder to cease being a tax resident than it is to become a tax resident … which is an outcome that not everyone will be pleased about.”
He said circumstances where someone regularly spent more than 45 days in an income year working in Australia for an overseas entity could trigger tax residency.
“It would unfortunate, and very problematic, for individuals that want to visit Australia for an extended period of time to be discouraged from doing so,” he said. “It’s important to understand how this framework can create unintended consequences based on how other factors are used to determine residency.”
On the other hand, bright line tests meant there was the potential for taxpayers to manipulate their behaviour to achieve a certain outcome that was inconsistent with the policy intent.
Another issue concerned the interaction of the rules with double tax agreements, which were not subject to the consultation process.
“We have the benefit of looking at the way other jurisdictions around the world have developed rules for dealing with this issue because it’s not unique to Australia,” he said.
“Let the consultation process begin and let’s be grateful that there is a long response period to hammer out all the details.
“Depending on the outcome of the consultation process, the government may not even proceed with the proposed framework if it does not achieve the intended outcome of simplicity, consistency and certainty.”
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